If there’s one word I can use to describe today’s market, it would be confusing. Buyers and sellers are really confused from everything they’re hearing and reading about Real Estate and it results in frustration for those who actually want to buy or sell.
“I just need info about the home because I’m going to deal directly with the bank.”
“I see that the listing price is set at $499,000. Since this is a buyer’s market, I can offer $200,000, right?”
Here’s my favorite: “Do you think we should wait until prices go down more?”
I follow trustee sales (foreclosure auctions) daily. I have a client who makes a living flipping properties (yes — in TODAY’s market). More than half the homes I sell are either Short Sales or Foreclosures. From this working knowledge “in the trenches”, I feel obligated to share my side of these myths:
1. “I can buy a foreclosed home directly through the bank.” FALSE – unless you plan on buying a “pool” of properties or notes (which you’ll need connections anyway) the last thing the bank wants to deal with is babysitting an escrow. Can you imagine someone at Bank of America 3,000 miles away (or overseas) handling buyer showings, termite inspections, coordinating appraisals, etc ??? Visit ANY of the major banks’ websites or call them to see for yourself. They’ll instruct you to call the assigned Listing Agent.
2. “You should always offer significantly below the list price.” FALSE – Of course, “always” is a giveaway. When done correctly, list prices on Bank Owned homes are set at what local Real Estate agents think buyers are willing to pay. There’s the dillema: if a buyer offers more than you, why should the bank accept your low-ball offer?
3. “I can offer as much as 20% below other offers because my offer is cash.” IT DEPENDS. I’m seeing a trend where some asset managers are preferring buyers with a loan over an investor with cash. Many inexperienced Real Estate agents will make the mistake of assuming a cash transaction is a safe transaction. My experience with cash buyers has been that they’ve had high cancellation rates when they can’t focus on one property. On the flip side, a cash offer can result in a significant savings when the home requires repairs that will not allow conventional financing. Another opportunity can be a listing that has fell out of escrow numerous times and the asset manager and agent just want it sold.
4. “Working directly with the listing agent will result in the best deal.” FALSE. I’ve met some REO Agents that have over 20 listings and the last thing they want is a call from a buyer. Many of them have teams of assistants and buyer’s agents. When you call the agent’s number directly, you’ll be transferred to a “buyers agent” on the team. Buyer’s agents are usually junior licensees that are either part time or just starting in the business. Additionally, some banks such as Indymac do not allow an agent to represent both sides of a transaction. The one instance where you can expect the best deal is if the agent breeches their fiduciary duty to their seller and witholds higher offers. In this case, do you really want a shady agent handling your most important investment?
5. “I’ve seen on lots of websites that you can buy a home in Orange County for $20,000. Is this correct?” FALSE. Many of the popular foreclosure websites such as RealyTrac and ForeclosureRadar occasionally show a junior lien loan amount. This is often the “opening bid” amount at the trustee sale when the 2nd or junior mortgage decides to foreclose. Unfortunately, any senior loan and taxes must be accounted for as well. After you sum it up, the price is often higher than the market value of the home.
6. “I can just attend the foreclosure auction and get a huge discount.” FALSE. First of all, there are (2) types of auctions: 1) The Trustee Sale and 2) Advertised Auctions for the general public. Let’s talk about the trustee sale: Most of the buying public does not possess the skill and savvy needed to stomach the Trustee Sale. You’ll need to show up with a cashier’s check with at least the opening bid amount and additional cashier’s checks for the increments you’ll be bidding. Beyond that, you’ll need to know everything on the title on the property and the occupancy status. Even if you have those bases covered, keep in mind that you’ll be bidding against some fierce competition. There will be investors present (usually in gym clothes or pajamas) that have been doing this for a living for years. The Advertised Auctions usually consist of homes that failed to sell through traditional means (Multiple Listing Service with Realtors). While discounts are possible at these ballroom-style events, they are far from a sure thing.
7. “In today’s market, the buyer is in total command.” FALSE. While this may hold true in parts of the country and homes priced over $800,000, Orange County’s inventory levels are never high enough where you can shop for a home and see 10 properties that suit your needs. Buyers usually only find 1 or 2 homes that come close to what they want only to find out there are multiple offers. This video I made on YouTube hits the nail on the head why buyers are frustrated in this market.
8. “In this market, waiting for prices to come down is the best strategy.” FALSE. Take it from the experts who are savvy enough to flip for a profit in this market: The best strategy is to find a deal — not wait. I’ve never heard an investor say “I’m waiting for a deal.” Waiting is perfectly fine while watching the market — just as long as you have a defined, measurable indicator when to re-enter (i.e. – inventory levels, months of supply, etc). Unfortunately, most “waiting buyers” don’t have a signal when to re-enter and will end up waiting for a “good” market when the prices are higher.
9. “Most of the banks will favor offers where the buyer’s loan is with their company.” TRUE. Not only do some favor these offers, but it’s often a requirement to obtain a pre-approval with their bank. I’ve experienced offers getting ignored when my buyer had an approval with another lender or mortgage broker.
10. “There are more risks involved in buying a bank owned home compared to a traditional equity sale.” TRUE. While a buyer can minimize their risk by hiring the right agent and inspector(s), the buyer won’t get the benefit of a Transfer Disclosure Statement (TDS), Seller Property Questionaire (SPQ), or a listing agent/asset manager willing to match your motivation and work into the deal. My experience with high volume Listing Agents of Bank-Owned homes is that they’ll often take “the path of least resistance” (i.e. – less work is better) when solving escrow problems. When encountering issues during escrow, I’ve realized there is only ONE agent working to get the deal done: The Buyer’s Agent. I’ve witnessed transactions where the listing agent would rather cancel the deal and accept a lower offer if it meant “less maintenance” in the eyes of the asset manager that holds their prized REO account. Of course, there are some truly GREAT REO agents who are worth their weight in gold — it’s just extremely rare.
Overall, it’s true that you can obtain a pretty good deal buying a Bank-Owned home. Just don’t expect it to be easy.